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A policyholder is not required to prove ascertainable damages to be entitled to an award of punitive damages against an insurer when a jury finds liability for bad faith, the Fourth Circuit Court of Appeals has ruled. Rather, where a jury finds a “willful or reckless invasion of a legal right,” nominal damages, which are an adequate basis for an award of punitive damages, are presumed. The holding is a victory for policyholders, allowing them to make a case for punitive damages without demonstrating an ascertainable loss, and potentially providing them with additional leverage in bad faith cases.

Detailed Discussion

J.T. Walker Industries and its subsidiary, MI Windows and Doors, were defendants in five separate product defect actions filed by homeowners associations as a result of alleged water damage. MI had several liability policies with Liberty Mutual Fire Insurance Company, all of which were subject to $500,000 deductibles. MI pushed Liberty to take the product defect cases against it to trial, concerned that, by settling, MI would be viewed as an easy target in subsequent litigation. But Liberty settled and paid all five suits, although each suit was settled for amounts within the deductible.

Under its policies, Liberty had the right to settle claims and suits. Because each of the suits was settled within the deductible, Liberty sought to recoup from MI the settlement amounts it had paid. MI refused to pay, and Liberty filed suit. MI responded with a bad faith counterclaim, alleging that Liberty acted unreasonably in settling the cases.

The case went to trial, and the federal court jury in South Carolina handed down a split verdict. The jury agreed that MI owed Liberty contract damages and ordered MI to pay Liberty $894,416.01. But the jury also determined that Liberty was liable for actual and punitive damages on MI’s bad faith claim, awarding MI $684,416.01 and an additional $12.5 million in punitives.

The district court set aside the entirety of the bad faith damage award against Liberty based on a finding that MI had suffered no actual damages because MI had not paid the cost of the settlements. Without actual damages, the district court held, punitives were not available.

Both parties appealed on numerous grounds. The Fourth Circuit affirmed the majority of the lower court’s rulings, including the jury award against MI and the dismissal of the actual damages award against Liberty. Importantly, however, the court vacated the district court’s ruling on the punitive damages award.

“An absence of ascertainable damages does not necessarily preclude nominal or punitive damages where, as here, the jury finds a party liable for punitive damages,” the court opined. Although the court acknowledged that punitive damages are generally only awarded where a court also awards actual or nominal damages, “[w]here a jury finds a willful or reckless invasion of a legal right, a court presumes that nominal actual damages are merged into a punitive damage award.”

MI was entitled to the opportunity to have the jury consider liability for punitive damages, the court explained. The jurors were properly instructed on the issue and held Liberty liable for “willful, wanton, or reckless” actions. “As a result, MI is not prohibited from receiving punitive damages,” the court concluded.

The panel did not, however, reinstate the $12.5 million punitive award. Instead, it remanded the case for the district court to consider whether the evidence supported the jury’s finding that Liberty acted willfully, wantonly, or recklessly. “If the court finds the evidence sufficient, then nominal damages may be presumed, and the court must consider whether punitive damages are appropriate and whether the jury’s award was excessive.”

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